Qifu Technology: Still Neutral Considering Fundamentals And Valuations
Contributor since 2012 / 11331 Followers
Summary:
- Qifu Technology’s share price declined in the recent month despite beating Q3 2023 consensus projections, as a result of loan volume contraction and asset quality concerns.
- Qifu Technology’s capital-light model transition has been progressing at a slower-than-expected pace, as the company wants to strike a balance between profitability and risk.
- The market values QFIN at an appealing low-single-digit P/E multiple, and the company has been returning a greater proportion of its excess capital to shareholders in recent times.
- Considering both the stock’s fundamentals and valuations, a Hold rating for QFIN is justified.
spfdigital
Elevator Pitch
I rate Qifu Technology, Inc. (NASDAQ:QFIN) shares as a Hold.
Qifu Technology was formerly known as 360 DigiTech, before the company changed its name at the end of March. I previously touched on the relevant regulatory developments and the business model transition for QFIN in my initiation article published on March 2, 2023.
It is hard to view QFIN’s fundamentals as strong, taking into account its loan volume guidance and asset quality metrics. On the other hand, Qifu Technology’s undemanding valuations are supported by the company’s shareholder-friendly capital return approach. As such, I have decided that a Hold rating for Qifu Technology remains fair.
Eyes On Asset Quality And Loan Growth
QFIN’s share price has declined by -7.0% in the one month since the company revealed its Q3 2023 financial performance with a press release issued on November 16 after trading hours. During the same time period, the broader market as represented by the S&P 500 rose by +5.2%.
The company’s actual Q3 2023 top line and normalized net profit came in +2.8% and +5.3% higher than the sell-side analysts’ consensus forecasts, respectively as per data sourced from S&P Capital IQ. But Qifu Technology’s third-quarter results beat didn’t translate into stock price appreciation, and this is likely attributable to QFIN’s asset quality concerns and its disappointing loan growth.
There are good reasons to be concerned with Qifu Technology’s asset quality based on two key metrics disclosed in QFIN’s third-quarter earnings release. QFIN’s Day-1 delinquency rate rose by +0.4 percentage points from 4.2% for Q2 2023 to 4.6% in Q3 2023, while its 30-day collection rate decreased by -0.5 percentage points QoQ from 87.2% to 86.7% in the same time frame. At its Q3 2023 earnings briefing, Qifu Technology attributed the increase in Day-1 delinquency rate and the decline in 30-day collection rate for the latest quarter to weaker than expected “macro indicators” and “the seasonality of the credit industry (1H is superior to 2H).”
Definition Of QFIN’s Day-1 Delinquency Rate And 30-Day Collection Metrics
Qifu Technology’s Q3 2023 Results Release
Separately, QFIN’s facilitation and origination loan volume amounting to RMB123.2 billion for Q3 2023 was -0.8% lower than the RMB124.2 billion the company achieved in Q2 2023. Furthermore, Qifu Technology is expecting an even lower RMB121 billion loan volume for Q4 2023 based on the mid-point of the company’s guidance.
To sum things up, weaker-than-expected Q3 2023 loan growth, a lackluster Q4 2023 loan volume guidance, and a slight deterioration in asset quality as indicated by certain metrics, helped to explain QFIN’s share price underperformance in the past month.
QFIN’s Capital-Light Model Transition In The Spotlight
In my March 2023 write-up, I noted that “QFIN will most probably take some time to make further headway with its capital-light business model transition.” My point of view has been validated by Qifu Technology’s latest operating metrics and management commentary.
The proportion of outstanding loan balance for Qifu Technology that is attributed to the company’s capital-light model declined from 62.3% in Q2 2023 to 61.5% for Q3 2023. During the same time period, the percentage of QFIN’s new loan originations executed under the capital-light model decreased from 57.8% to 56.5%.
QFIN guided at its third-quarter results call that its “loan mix (of capital-light and capital-heavy loans)” will be “largely stable in the foreseeable future”, as it intends to “balance profitability and the long-term healthiness and the sustainability of our loan portfolio.” The capital-heavy model boasts a higher average take rate as compared to the capital-light model, but the former requires Qifu Technology to bear credit risks.
In summary, it will be tough for Qifu Technology to increase its mix of capital-light loans in a substantial way for the near term, which means that this won’t be a catalyst for the stock.
Shareholder Capital Return Will Limit Downside For Qifu Technology’s Stock
Qifu Technology has done reasonably well in improving the company’s shareholder capital return, and this will help to provide support for the company’s share price to some extent.
QFIN disclosed in its Q3 2023 earnings presentation slides the changes that the company has made to its capital return framework.
The company has raised its targeted dividend payout from 15%-20% in the past to 20%-30% beginning this year. This has led to a +56% HoH (Half-on-Half) growth and a +20% increase in dividends (in absolute terms) for 1H 2023.
Qifu Technology has a $150 million share buyback program that is effective between mid-2022 and mid-2023. QFIN has already completed more than half of its share repurchase plan ($80 million) by the middle of November this year.
There is a good chance of further upside relating to the company’s future dividends and share buybacks. Qifu Technology emphasized at its most recent quarterly earnings call that it will conduct a “review (of its capital return strategy) based on the cash position” after the current buyback plan is completed, and “make necessary changes to the shareholder return program.”
QFIN is now trading at a consensus forward the next twelve months’ normalized P/E multiple of 3.4 times as per S&P Capital IQ data. Qifu Technology’s asset quality concerns, loan volume contraction, and the slower-than-expected progress with the capital-light model transitions are negatives for the stock. However, the company’s favorable capital return initiatives should limit the downside for its shares.
Closing Thoughts
My existing Hold rating for QFIN is intact. I have a negative view of Qifu Technology’s asset quality and loan growth outlook. But I acknowledge that QFIN’s valuations are appealing, and I think the company has done a good job in terms of returning excess capital to shareholders.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Asia Value & Moat Stocks is a research service for value investors seeking Asia-listed stocks with a huge gap between price and intrinsic value, leaning towards deep value balance sheet bargains (i.e., buying assets at a discount, e.g., net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e., buying earnings power at a discount in great companies like "Magic Formula" stocks, high-quality businesses, hidden champions and wide moat compounders). Sign up here to get started today!